$2 E*Trade (ETFC): Desperately Trying to Save Self

e*Trade is finally starting to relate its desperate salvage efforts in more detail--and some of its actions sound positive. Unfortunately, the firm's PR team still hasn't stopped spinning, so battered investors can be forgiven for thinking that they still haven't heard the worst of it.

Judging from today's release, E*Trade appears to have sold $3 billion of mortgage and muni bonds for only a $5 million realized loss (good) and reduced its wholesale borrowing by $3.5 billion in Q4. It has eliminated its institutional trading business (30 jobs) and brought in a new executive, Robert V. Burton of Wachovia, to reduce the risk of its real-estate portfolio. It says its capital ratios are strong.

All good. But here's what inquiring minds want to know:

What, exactly, is the risk in the real-estate portfolio? $5 million in realized losses is nice, but what's scary is the un-realized losses--which e*Trade steadfastly refuses to disclose. The firm reports that the "home equity loan portfolio continues to run off as anticipated, ending the year with under $12 billion in balances," but it doesn't give any indication of how recoverable any of that $12 billion is. For a company with only a $1 billion equity market cap (down 90% since last summer), $12 billion is a lot of debt. How much of it is worthless?

Why is e*Trade issuing rosy-looking "gross customer addition" numbers without also providing the more meaningful net customer additions? E*Trade cheerily reports that it signed up 87,000 gross accounts in December. That's nice--some folks are still betting that they won't be forced to rely on the company's insurance to protect their assets--but what about customer losses? Judging from the customer cash balances, which remained steady at $33 billion from November to December, E*Trade's customer gains are being offset by losses. We would feel more confident about E*Trade's forthrightness if it had just told us that.

E*Trade apparently still hasn't realized that its biggest problem is a credibility problem. And in highly leveraged businesses like banks (and Enrons), credibility is the company's most critical asset. The next key step in E*Trade's salvage operation is to demonstrate that it finally understands this--by coming clean and giving us all the news, not just the data-mining spin.